Testimony 

Before the Committee on Finance, U.S. 

Senate

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Wednesday, April 28, 2004 MEDICARE

CMS Did Not Control Rising 

Power Wheelchair Spending

Statement of Leslie G. Aronovitz 

Director, Health Care—Program 

 Administration and Integrity Issues 

GAO-04-716T 
www.gao.gov/cgi-bin/getrpt?GAO-04-716T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Leslie G. 

Arnonovitz at (312) 220-7600. 

Highlights of GAO-04-716T, a testimony 

before the Committee on Finance, U.S. 

Senate 

April 28, 2004

MEDICARE

CMS Did Not Control Rising Power 

Wheelchair Spending 

Although the four contractors that process DME claims identified escalating 

power wheelchair spending as early as 1997, CMS did not lead a coordinated 

response until September 2003. Inadequate information to review claims; 

limited resources, which caused contractors to scale back their claims 

review efforts; and flaws in the process to screen suppliers before they could 

bill Medicare left the program vulnerable to millions of dollars in claims paid 

improperly. Medicare spending for power wheelchairs grew fastest in region 

C, but resources to review claims were particularly constrained for that 

region’s contractor. CMS has introduced a 10-point plan that appears to be a 

reasonable approach to reduce improper payments. 

Medicare Power Wheelchair Spending, Region C Compared to All Other Regions 

Note: Medicare spending includes federal payments and beneficiary cost sharing. 

The MMA requires CMS to use competitive bidding to set payment rates for 

DME. Competitive bidding shows potential for CMS to set market-driven 

payment rates to help keep pace with changes in prices for medical 

equipment. 

GAO discussed these findings with program officials, who provided 

technical comments. 

Medicare spending for power 

wheelchairs, one of the program’s 

most expensive items of durable 

medical equipment (DME), rose 

450 percent from 1999 through 

2003, while overall Medicare 

spending rose by about 11 percent 

for the same period, according to 

the Centers for Medicare & 

Medicaid Services (CMS). 

This spending growth has raised 

concerns that Medicare made 

improper payments and has 

payment rates that are out of line 

with market prices. In May 2003, 

the Department of Justice indicted 

power wheelchair suppliers in 

Texas alleged to have fraudulently 

billed Medicare. The Medicare 

Prescription Drug, Improvement, 

and Modernization Act of 2003 

(MMA) contains provisions 

regarding DME, such as changing 

payment setting methods. GAO 

was asked to examine (1) steps 

taken by CMS and its contractors 

to identify and respond to improper 

payments for power wheelchairs 

and (2) how MMA will affect CMS’s 

ability to set payment rates for 

DME. 

To examine these issues, GAO 

analyzed claims data reports for 

CMS’s four DME regions, reviewed 

applicable legislation, regulations, 

and CMS and contractor 

documents, and interviewed CMS 

and contractor officials, DME 

suppliers and manufacturers, DME 

industry representatives, and 

beneficiary advocacy groups. GAO 

focused attention on region C, 

which includes Texas. 
Page 1 GAO-04-716T 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today as you discuss issues regarding Medicare 

program payments for power wheelchairs. Medicare fee-for-service power 

wheelchair spending is expected to total over $1 billion in 2003. Spending 

for power wheelchairs rose 450 percent from 1999 through 2003, according 

to the Centers for Medicare & Medicaid Services (CMS),1

 the agency 

responsible for managing the Medicare program. In contrast, overall 

Medicare spending increased by about 11 percent during the same period. 

At about the same time, the number of beneficiary claims for this item of 

durable medical equipment (DME) nearly tripled, while the overall 

Medicare population increased by just 1 percent. 2 Power wheelchairs rank 

among Medicare’s most expensive items of DME, and in 2003, Medicare 

paid about $5,000 for each basic power wheelchair with standard options, 

and even more if special accessories were included. 

Escalating spending can be fueled by improper payments and payment 

rates that are out of line with market prices. Improper payments can result 

from mistakes on the part of suppliers, beneficiaries, or beneficiaries’ 

physicians. For example, improper payments can occur when suppliers 

submit claims on behalf of beneficiaries who do not meet Medicare’s 

coverage criteria for power wheelchairs. Improper payments can be due to 

fraud—intentional misrepresentation—and abuse. For example, in May 

2003, the Department of Justice began indicting some physicians and 

wheelchair suppliers in Texas that were alleged to have billed Medicare 

for power wheelchairs that beneficiaries never received. Rising spending 

can also result when Medicare pays above-market prices for power 

wheelchairs. We and the Department of Health and Human Services (HHS) 

Office of Inspector General (OIG) have reported that Medicare pays more 

than other insurers and public programs for some items of DME—

 1

Until July 1, 2001, CMS was called the Health Care Financing Administration (HCFA). 

2

Medicare defines DME as equipment that may be prescribed by a physician for a patient’s 

use for an extended period of time. This equipment serves a medical purpose, can 

withstand repeated use, is generally not useful in the absence of an illness or injury, and is 

appropriate for use in the home. 42 U.S.C. § 1395x(n) (2000). 
Page 2 GAO-04-716T 

including power wheelchairs.3 As we have testified in the past, CMS and its 

contractors—insurance companies that administer Medicare fee-forservice DME claims, called DME regional carriers—have had difficulty 

setting payments for DME that reflect current health care market prices.4

The Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (MMA) contains provisions to address some of the difficulties 

regarding DME payment setting and requirements that will affect the 

conditions under which power wheelchairs are provided. 5

 

My remarks today will focus on (1) steps taken by CMS and its contractors 

to identify and respond to improper payments for power wheelchairs and 

(2) how MMA will affect CMS’s ability to set payment rates for DME. 

Because about two-thirds of power wheelchair payments were made by 

Palmetto Government Benefits Administrators in 2002—including those in 

Texas—I will be focusing some of my remarks specifically on that DME 

regional carrier. 

To evaluate the steps CMS and its contractors took in identifying and 

responding to improper payments, we reviewed DME claims payment data 

analysis reports on DME claims payment from CMS’s statistical 

contractor; written policies and procedures from CMS and its contractors; 

budget and expense data for contractor activities; Medicare coverage 

policies, which explain the criteria for determining whether and under 

what conditions items are covered; and CMS’s plan for responding to 

payment problems with Medicare’s power wheelchair benefit. We also 

interviewed CMS and contractor officials, suppliers, industry 

representatives, manufacturers, and beneficiary advocacy groups. For 

DME claims payment data covering 1997 to 2002, we reviewed CMS and 

contractor internal control procedures to help ensure that these data were 

 3

Testimony of Janet Rehnquist, Inspector General, Department of Health and Human 

Services, Medicare Reimbursement for Medical Equipment and Supplies, before the 

Senate Committee on Appropriations, Subcommittee on Labor, Health and Human 

Services, and Education, 107th Cong., 2nd sess., Washington, D.C.: June 12, 2002; U.S. 

General Accounting Office, Medicare Payments: Use of Revised “Inherent 

Reasonableness” Process Generally Appropriate, GAO/HEHS-00-79 (Washington, D.C.: July 

5, 2000); and U.S. General Accounting Office, Medicare: Home Oxygen Program Warrants 

Continued HCFA Attention, GAO/HEHS-98-17 (Washington, D.C.: Nov. 7, 1997). 

4

U.S. General Accounting Office, Medicare: Challenges Remain in Setting Payments for 

Medical Equipment and Supplies and Covered Drugs, GAO-02-833T (Washington, D.C.: 

June 12, 2002). 

5

Pub. L. No. 108-173, § 302, 117 Stat. 2066, 2223. 
Page 3 GAO-04-716T 

accurate, timely, and complete, and, where appropriate, we tested data for 

internal consistency. We determined that these data were adequate for 

addressing the issues in this testimony. Contractor budget and expense 

data are self-reported by CMS or the contractors, and we did not validate 

these data. To understand CMS’s experience with setting payments for 

DME that are in line with market prices, we reviewed CMS regulations and 

other documents, and interviewed CMS staff. We also reviewed our 

previous reports and reports issued by the HHS OIG and CMS to identify 

alternative approaches to setting prices for DME. We conducted our work 

from February through April 2004 in accordance with generally accepted 

government auditing standards. 

In summary, starting as early as 1997, contractors identified problems with 

power wheelchair payments, but it was not until September 2003 that CMS 

began to lead a full-scale, coordinated effort to address improper 

payments. Further, the agency did not address program safeguard 

shortcomings that contributed to the growth in spending for this benefit. 

These included inadequate information to properly review and adjudicate 

claims; limited resources, which caused contractors to scale back their 

claims review efforts; and flaws in the process to screen suppliers before 

they could bill Medicare. CMS’s recent coordinated effort to reduce 

improper payments for power wheelchairs through a 10-point plan appears 

reasonable, and the agency has at least started, and in some cases has 

implemented, all of its elements. 

The MMA requires CMS to use a new approach to setting DME payments 

by using competitive bidding among suppliers to help determine payment 

rates.6

 The agency’s use of Medicare’s prior authority to adjust DME 

payment rates has not enabled Medicare to keep pace with changes in 

prices for medical equipment. As a result, Medicare often pays more for a 

DME item than other public payers. In contrast, competitive bidding 

shows promise as a way for CMS to use market forces to set more 

reasonable payment rates. 

Most Medicare beneficiaries purchase part B insurance, which helps pay 

for certain physician, outpatient hospital, laboratory, and other services; 

medical supplies and DME; and certain outpatient drugs. A wide variety of 

DME items—including power wheelchairs—are covered if they are 

 6

MMA § 302(b), 117 Stat. 2224. 

Background 
Page 4 GAO-04-716T 

medically necessary for the beneficiary’s use in the home and prescribed 

by a physician. Medicare part B pays for most DME using state-specific fee 

schedules based on statewide average supplier charges on Medicare 

claims paid during 1986 and 1987. Since then, fee schedules have been 

updated for inflation in some years. Medicare pays 80 percent and the 

beneficiary pays the balance of either the actual charge submitted by the 

supplier or the fee schedule amount, whichever is less. If a beneficiary has 

supplemental insurance, the insurance may cover the 20 percent 

copayment. 

Four DME regional carriers are each responsible for reviewing and paying 

claims submitted by outpatient providers and suppliers on behalf of 

beneficiaries living in specific parts of the country.7

 For example, Palmetto 

is responsible for processing claims for beneficiaries permanently residing 

in region C, which encompasses 14 states—including Texas and Florida—

and Puerto Rico and the Virgin Islands. 

The DME regional carriers and other contractors conduct program 

safeguard activities to identify and respond to improper payments for 

DME claims (see table 1). In addition to the DME regional carriers, three 

other contractors play important roles: 

• The Statistical Analysis Durable Medical Equipment Regional Carrier 

(SADMERC) analyzes claims data and identifies and reports trends in 

billing by item, geographic region, supplier, and physician to DME regional 

carriers and CMS staff. 

• TriCenturion, LLC is a specialized program safeguard contractor 

responsible for reviewing claims and investigating and developing fraud 

cases for claims processed by region A. The other three DME regional 

contractors conduct these activities themselves for the claims they 

process. 

• The National Supplier Clearinghouse (NSC) enrolls and authorizes 

suppliers to bill Medicare by evaluating supplier applications and 

performing on-site visits to suppliers’ places of business. 

 7

The four DME regional carriers are HealthNow New York, Inc. (region A), AdminaStar 

Federal (region B), Palmetto Government Benefits Administrators (region C), and CIGNA 

HealthCare Medicare Administration (region D). See app. I for the states in each DME 

regional carrier’s jurisdiction. In this testimony, “states” refers to the 50 states, the District 

of Columbia, U.S. territories, and the Commonwealth of Puerto Rico. 
Page 5 GAO-04-716T 

CMS oversees these contractors’ activities through various means, such as 

performing yearly site visit evaluations, reviewing planned activities, 

monitoring data and periodic reports, and conducting regular conference 

calls and other monitoring activities. 

Table 1: Contractors’ Activities to Identify and Respond to Improper Payments 

Responsibility Contractor Activities 

Analyze billing SADMERC The SADMERC conducts ongoing data analysis and 

reporting for the DME regional carriers and CMS. Its reports 

are used to identify trends in payment and potential fraud. 

 TriCenturion and DME regional 

carriers for regions B, C, and D 

TriCenturion and the DME regional carriers for regions B, 

C, and D analyze claims payment data to uncover improper 

payments or to investigate and develop fraud cases. 

Review claims against coverage 

criteria 

TriCenturion and DME regional 

carriers for regions B, C, and D 

These contractors are responsible for conducting medical 

reviews of submitted claims either before or after payment 

to determine if the claims should be, or should have been, 

paid. Claims are reviewed to see if the beneficiaries’ 

conditions meet Medicare coverage criteria. Medical review 

can be conducted through automated decisions to pay or 

deny claims based on coverage criteria or may require 

complex medical reviews. Complex medical reviews are 

conducted by clinical staff, such as a nurse or doctor, who 

examines additional documentation provided by the 

supplier or the beneficiary’s physician, such as copies of 

the beneficiary’s medical records or an evaluation by a 

physical or occupational therapist of the beneficiary’s ability 

to walk. If medical review identifies claims that should not 

have been paid, the DME regional carrier that paid the 

claim is responsible for collecting overpayments and 

educating the supplier about appropriate billing. 

Investigate potential fraud TriCenturion and DME regional 

carriers for regions B, C, and D 

These contractors investigate cases of suspected fraud, 

which can involve conducting a more detailed analysis of 

claims and other investigative steps. Once a case has been 

developed, it is referred to the HHS OIG or to law 

enforcement for prosecution. 

Enroll suppliers NSC NSC is responsible for verifying information on supplier 

applications to ensure that suppliers meet 21 standards and 

that only valid suppliers can bill Medicare. NSC also issues 

suppliers’ billing numbers, maintains a central database of 

information on DME suppliers, reenrolls active suppliers, 

and assists with fraud and abuse investigations. 

Source: GAO. 
Page 6 GAO-04-716T 

Although there were multiple warning signs over a 6-year period that 

growth in claims and payments for power wheelchairs may have been 

excessive, CMS did not lead a full-scale, coordinated effort to address the 

issue until September 2003. CMS has recently taken actions to reduce 

improper payments for power wheelchairs through a 10-point action plan. 

In addition, Congress recently took steps intended to bolster efforts to 

tackle fraud and abuse in the power wheelchair benefit. 

In 1997, CMS’s data analysis contractor—the SADMERC—issued an alert 

about rapid increases in the utilization of power wheelchairs. As part of its 

data monitoring efforts, the SADMERC noted that payments for power 

wheelchairs had tripled from October 1995 to March 1997, growing from 

almost $8 million to about $24 million. For the next few years, the 

SADMERC’s reports continued to regularly highlight the abnormally rapid 

growth in power wheelchair payments, identifying the states and the 

suppliers for which claims volume was particularly high. Although these 

reports went to agency officials responsible for ensuring that program 

funds are safeguarded, CMS staff told us that their contractors—the DME 

regional carriers—have primary responsibility for using and responding to 

data indicating rapid increases in utilization. 

After reviewing SADMERC data in 1997, all four DME regional carriers’ 

medical directors became concerned and identified possible approaches 

to address what they described as “tremendous growth” in Medicare 

power wheelchair spending. In a joint April 1998 memorandum sent to 

CMS, the medical directors notified the agency of these concerns and 

requested assistance to address power wheelchair payment growth. The 

1998 memorandum cited a 472 percent increase in power wheelchair 

spending from the first quarter of 1995 compared to the fourth quarter of 

1997, and proposed implementing changes in the coverage policy for 

power wheelchairs. However, because of competing priorities, the DME 

regional carrier medical directors never completed the policy revision, nor 

did CMS direct them to do so. Figure 1 illustrates national Medicare power 

wheelchair spending between 1997 and 2002. 

CMS Slow to Respond 

to Escalating Power 

Wheelchair Payments, 

but Recent Plan 

Appears Reasonable 

Despite Recurrent 

Warnings, CMS Did Not 

Lead Effort to Reduce 

Escalating Power 

Wheelchair Payments Until 

2003 
Page 7 GAO-04-716T 

Figure 1: National Medicare Power Wheelchair Spending 

Note: Medicare spending includes federal payments and beneficiary cost sharing. 

Between 1998 and 2000, DME regional carriers again tried to address 

significant increases in power wheelchair payments by using the tools that 

they already had to address improper payments. The DME regional 

carriers examined power wheelchair claims through medical review—

either before or after claims payment—and investigated potential fraud 

cases. However, CMS decreased the funding it provided to DME regional 

carriers to conduct medical review activities about 22 percent, comparing 

fiscal year 1999 and fiscal year 2003. Funding for medical review covers 

activities such as computerized claims review and complex medical 

review. For example, in fiscal year 2003, Palmetto received $3.1 million for 

medical review activities, about 15 percent less than it received in 1999. 

The decline in funding for claims review is even more dramatic when 

weighed against the increase in Medicare claims payment by DME regional 

contractors. Overall, the amount of medical review funding per $100 in 

submitted claims dropped over 50 percent from fiscal year 1999 through 

2003 for claims processed by the DME regional carriers. Moreover, 

compared to the three other regions, Palmetto received less medical 

review funding per $100 in submitted claims each year from fiscal year 

1999 through 2003. As figure 2 shows, Palmetto had the highest volume of 

power wheelchair claims payment and its payment growth was 

outstripping that of other regions. Although Palmetto had more than 

tripled the number of submitted power wheelchair claims on which it 

conducted complex medical review from fiscal year 2000 to 2002, it still 
Page 8 GAO-04-716T 

only reviewed about 3 percent of its power wheelchair claims in 2002. The 

number of claims that received complex medical review in regions B, C, 

and D fell 39 percent from fiscal years 2001 through 2003.8

 Medical review 

is one of the activities that CMS has noted as saving Medicare about $17 

for every dollar spent.9

Figure 2: Regional Medicare Power Wheelchair Spending 

Note: Medicare spending includes federal payment and beneficiary cost sharing. 

In the late 1990s, power wheelchair fraud had also surfaced as a serious 

problem. Palmetto launched a major fraud investigation of power 

wheelchair suppliers in Florida and other southeastern states in 1996. This 

investigation uncovered fraudulent supplier activities, including billing for 

services not rendered or not medically necessary and delivering a less 

 8

This information was not available from region A. 

9

U.S. Department of Health and Human Services, Centers for Medicare & Medicaid 

Services, Justification of Estimates for Appropriations Committees, Fiscal Year 2004

(Washington, D.C.: n.d.) CMS reported data on past savings from fiscal years 2002 through 

2004. 

0

100

200

300

400

500

600

Dollars in millions

Region A (HealthNow New York, Inc.)

Region B (AdminaStar Federal)

Region C (Palmetto Government Benefits Administrators)

Region D (CIGNA HealthCare Medicare Administration)

1997 1998 1999 2000 2001 2002

Source: CMS.
Page 9 GAO-04-716T 

expensive power-operated vehicle when billing for a more expensive 

power wheelchair. As a result of this investigation, Palmetto prepared a 

fraud alert about power wheelchairs for other contractors and 

investigative agencies, which CMS issued in June 1998. While fraud alerts 

increase external awareness of potential vulnerabilities, they also help the 

agency direct its efforts to address potential fraud. In this case, however, 

CMS did not require DME regional carriers to specifically scrutinize power 

wheelchair claims or undertake any other efforts to identify fraudulent 

billing for this item. 

In June 2000, the DME regional carriers’ medical directors sent a second 

jointly signed memorandum to CMS officials. They noted that, despite 

their efforts over a 2-year period to review power wheelchair claims, 

payments for power wheelchairs continued to increase significantly. The 

2000 memorandum noted that Medicare spending for power wheelchairs 

had grown by 869 percent from the first quarter of 1995 compared to the 

first quarter of 2000, and identified several problems that the carriers 

could not address alone. Despite this second warning from the 

contractors, CMS officials still did not attempt to aggressively address 

escalating power wheelchair spending—for example, it did not require a 

coordinated and consistent medical review or fraud investigation strategy 

by DME regional carriers. 

One problem cited in the 2000 memorandum was the disconnect between 

documentation the physician is required to sign to order a wheelchair and 

the program’s coverage criteria. To be reimbursed for power wheelchairs, 

suppliers must provide the carrier with a claim form and a supporting 

document called a Certificate of Medical Necessity (CMN). The physician 

or other clinician fills out a section of the CMN that answers questions 

about the beneficiary’s physical condition. However, the CMN does not 

ask about the beneficiary’s condition in enough detail for the DME 

regional carrier to determine whether Medicare’s coverage criteria are 

met. For example, the CMN for power wheelchairs questions whether the 

beneficiary requires a wheelchair to move about the home. In contrast, 

Medicare’s coverage policy for power wheelchairs is more specific, stating 

that the item is covered “if the patient’s condition is such that without the 

use of a wheelchair, he would otherwise be bed- or chair-confined.”10

Further, Medicare’s coverage criteria state that the patient must be 

 10Coverage Issues Manual, rev. 36, Section 60-9, www.cms.gov/manuals/06_cim/ci60.asp. 
Page 10 GAO-04-716T 

capable of safely operating the controls of a power wheelchair—a 

question not asked in the CMN. 

Despite the lack of a coordinated effort by CMS to curb rising costs, we 

found that the DME regional carriers tried to address the problem on their 

own. For example, several had shifted resources to medical reviews of 

power wheelchair claims. Around March 2002, Palmetto began to suspect 

another fraudulent wheelchair scheme was occurring in a different state. 

Specifically, Palmetto began to suspect that fraudulent power wheelchair 

claims had been submitted by suppliers in Harris County, Texas, and other 

parts of the state. A Palmetto fraud analyst had identified highly aberrant 

billing behavior for one supplier, which he began to monitor. Palmetto 

analysts also discovered that some suppliers were billing for a power 

wheelchair or for power wheelchair accessories multiple times on behalf 

of the same beneficiaries. By January 2003, Palmetto had referred many 

cases of suspected fraud concerning suppliers of power wheelchairs to the 

Dallas office of the HHS OIG for potential prosecution. Palmetto 

conducted additional investigations and made referrals throughout 2003, 

and investigations continue today. While Palmetto kept CMS informed 

about its investigations, its efforts to develop suspected fraud cases in 

2002 still did not convince CMS officials that it was time to take decisive 

action. 

Also in 2002, legitimate power wheelchair suppliers in Harris County, 

Texas, became increasingly suspicious about other suppliers’ activities in 

their area. For example, the two suppliers with whom we spoke learned 

that Medicare had paid other suppliers for power wheelchairs that 

beneficiaries had never received. Suppliers told us that they, other 

suppliers, and beneficiaries reported their suspicions to the Palmetto 

fraud unit, the Medicare fraud hotline, the Federal Bureau of Investigation, 

and the HHS OIG. The suppliers’ suspicions were supported by data 

indicating that, in 2002, 14 percent of Medicare’s power wheelchair 

spending was for beneficiaries in Harris County, although only 1 percent 

of Medicare beneficiaries lived in that area in 2001. 

Later in 2002, the CMS contractor responsible for DME supplier 

enrollment—NSC—noted that Texas had an unusually high number of 

suppliers compared to the number of beneficiaries residing there. Upon 

CMS’s request, NSC stationed one of its own employees in the Harris 

County area to conduct supplier site visits. During these site visits that 

began in September 2002, NSC’s inspector found instances of suppliers 

that did not have an appropriate place of business or had moved the 

business without giving NSC a forwarding address. Based on these 
Page 11 GAO-04-716T 

findings, from August 2003 through January 2004, NSC’s inspector led an 

effort to conduct site visits of every active supplier in Harris County, 

Texas, that had not received a site inspection since January 2003—about 

1,300 suppliers.11 These inspections found additional problems, including 

suppliers that lacked appropriate inventory or insurance or did not meet 

other requirements for Medicare DME suppliers. As a result, from 

September 2002 through March 2004, NSC revoked 367 Medicare power 

wheelchair supplier billing numbers for suppliers in the Harris County 

area. Supplier revocations occurred because steps taken by NSC to enroll 

only legitimate suppliers were unsuccessful. These steps did not protect 

Medicare from suppliers that failed to meet the supplier standards or 

committed power wheelchair fraud.12 

Three weaknesses in the supplier enrollment process left the Medicare 

program vulnerable to unscrupulous suppliers. First, NSC failed to verify 

submitted documents. NSC officials told us that they had traditionally 

accepted copies of key documents, such as liability insurance forms, at 

face value without verifying them. Failure to verify the accuracy of these 

documents had enabled supplier applicants to submit falsified papers and 

allowed them to become enrolled as Medicare suppliers. 

Second, the standards NSC uses to evaluate suppliers are not explicit. 

Officials at CMS and NSC told us that some of Medicare’s supplier 

standards lack specificity as criteria for NSC to use in determining the 

legitimacy of a supplier and played a role in allowing widespread fraud in 

Harris County, Texas. For example, one standard requires that the supplier 

“fills orders, fabricates, or fits items from its own inventory or by 

contracting with other companies for the purchase of items necessary to 

fill the order. If it does, it must provide, upon request, copies of contracts 

or other documentation showing compliance with this standard.” This 

standard does not specify a reasonable amount or type of inventory that 

would be expected, given the items the supplier intends to provide to 

Medicare beneficiaries. Further, NSC staff noted that the standard does 

not preclude a supplier from using another supplier as its primary source 

of inventory—even if neither of the two suppliers had enough inventory to 

 11NSC did not visit active suppliers that were large chains, physicians, optometrists, and 

pharmacies. 

12Suppliers must meet 21 standards. 42 C.F.R § 424.57(c)(1) – (21) (2003) (in effect since 

December 11, 2000). Suppliers must be in compliance with these standards in order to 

obtain and maintain their Medicare billing privileges. 
Page 12 GAO-04-716T 

be viable businesses. According to NSC staff, the broad language used in 

this standard is difficult to interpret and enforce. In their opinion, the 

broad language helped allow the widespread fraud in Harris County. 

Third, the predictability of site visits may render them less effective. CMS 

requires NSC to conduct a site visit of a supplier to assess compliance with 

the 21 standards before authorizing a new supplier to bill Medicare, and to 

conduct a site visit every 3 years thereafter, which is when suppliers must 

reenroll.13 However, applicants know to expect a site visit prior to 

receiving a supplier number and during a reenrollment period. Therefore, 

suppliers that are intent on committing fraud can present an illusion of 

legitimacy long enough to pass the inspection, knowing an inspector is not 

likely to return for 3 years. 

CMS officials indicated to us that they first became concerned about 

power wheelchair billing in early 2003. At that time, CMS created a task 

force to address abuses of the wheelchair benefit and developed a 10-point 

plan for addressing this potential abuse. CMS issued the plan in September 

2003. In December 2003, Congress passed the MMA, which includes 

measures that should also help CMS deter improper payments for power 

wheelchairs and other DME items. 

CMS’s 10-point plan provides a reasonable framework to strengthen the 

processes that CMS and its contractors use to identify and respond to 

improper payments for power wheelchairs. Two points in the plan 

specifically address fraud, abuse, and utilization issues in Harris County, 

Texas. They require CMS staff to review all payments for power 

wheelchairs in the county and conduct mandatory training of all power 

wheelchair suppliers in the county about Medicare coverage rules. CMS’s 

review of payments in Harris County is ongoing, and all suppliers in Harris 

County had been trained as of October 2003. Other parts of the 10-point 

plan are in different stages, from planning or early implementation to 

completion. Information on each of the 10 points is presented in table 2. 

 13CMS does not require NSC to visit every supplier. Suppliers that are Medicare-enrolled 

entities (hospitals, skilled nursing facilities, home health agencies, physicians, and 

ambulatory surgical centers) and existing supplier chains with 25 or more locations are 

excluded from site visits. 

Recent Steps May Help 

Curb Improper Payments 
Page 13 GAO-04-716T 

Table 2: CMS’s 10-Point Plan 

Point Purpose Plans and actions 

1 Prevent fraudulent suppliers from enrolling in 

Medicare for the sole purpose of receiving 

inappropriate payments. 

CMS stated that it would begin to aggressively scrutinize all new 

applications. NSC stopped issuing new supplier numbers in Harris 

County, Texas, in April 2003 and nationally in September 2003. NSC 

began issuing supplier numbers again in November 2003. 

2 Identify and prevent inappropriate enrollment of 

suppliers by providing a more detailed screening 

process, allowing CMS the time needed to properly 

review applications, and providing sanctions against 

suppliers abusing the enrollment process. 

CMS stated its intent to publish regulations to enhance the ability to 

screen new supplier applications. 

3 Address rampant fraud and abuse in the Harris 

County, Texas, area. 

CMS stated that, effective with the plan’s issuance, all payments for 

power wheelchairs in the Harris County, Texas, area would be 

individually approved by CMS staff in the Dallas regional office. 

4 Ensure that all wheelchair suppliers in Harris County, 

Texas, know and understand Medicare coverage 

rules. 

CMS stated that it would require all wheelchair suppliers in Harris 

County, Texas to attend mandatory training on wheelchair coverage 

and medical review policies. 

5 Quickly identify and punish fraudulent suppliers and 

stop the improper “hemorrhaging” of Medicare 

dollars. 

CMS, DME regional carriers, and law enforcement agencies will 

collaborate to process civil and criminal prosecutions. CMS also 

pledged to use payment suspensions. 

6 Ensure that national policy accurately defines the 

conditions under which Medicare will cover mobility 

products. 

CMS stated that it would finalize regulations revising coverage policy 

for power wheelchairs and scooters; the policy will require a medical 

provider to see a patient before prescribing a power wheelchair or 

scooter. 

7 Accurately portray the clinical conditions for which 

mobility products are reasonable and necessary and 

facilitate correct billing and payment for mobility 

devices. 

CMS stated that DME regional carriers would immediately adopt local 

medical review policies to educate suppliers and beneficiaries on 

Medicare’s coverage criteria for wheelchairs. 

8 When national billing and utilization trends are 

identified, ensure that only claims that are 

reasonable and necessary are paid and resolve 

national billing problems in a consistent manner. 

CMS stated that the DME regional carriers would adopt a consistent 

approach to medical review. 

9 Ensure that Medicare is paying appropriately for 

power wheelchairs. 

CMS stated that it would develop inherent reasonableness guidelines 

and apply this process first to power wheelchairs. 

10 Put physicians and beneficiaries back in charge of 

their mobility equipment decisions. 

CMS stated that it would clarify physicians’ responsibilities for 

prescribing power wheelchairs and educate beneficiaries about 

Medicare’s coverage criteria. 

Source: GAO analysis of CMS’s 10-point plan. 

In December 2003, following release of the plan, the DME regional carriers 

issued a bulletin outlining coverage criteria for power wheelchairs. The 

bulletin sparked controversy among suppliers, beneficiary advocates, and 

industry representatives, who argued that it reflected a new, overly 

restrictive coverage policy for power wheelchairs. CMS countered that the 

bulletin clarified long-standing national policy, but because of the 
Page 14 GAO-04-716T 

concerns raised, it rescinded the bulletin. CMS is still considering whether 

change to coverage criteria for power wheelchairs is needed. 

One area beyond the scope of the 10-point plan is the marketing of power 

wheelchairs to Medicare beneficiaries. Many individuals with whom we 

spoke contended that abusive and misleading marketing have further 

escalated utilization nationwide. A Texas supplier and CMS staff reported 

that companies were soliciting business door-to-door or promising free 

power wheelchairs to beneficiaries. Supplier advertisements on the 

Internet, in print, and on television have used the word “free” in 

connection with beneficiaries’ receiving power wheelchairs. Appendix II 

shows an example of an Internet advertisement that appears to illegally 

offer to waive Medicare copayments.14 A statutory provision prohibits 

suppliers from calling beneficiaries to solicit their business15 and this is 

reflected in the supplier standards. CMS has authority, however, to impose 

additional requirements16 and has not utilized this authority to ensure that 

supplier marketing is not abusive or misleading. 

The MMA includes two provisions that are intended to help CMS curb 

improper payments for power wheelchairs. First, it requires CMS to 

develop a new set of quality standards for suppliers17 that should 

complement the 21 standards suppliers must currently meet. The MMA 

also includes a provision that requires a face-to-face examination of a 

beneficiary by a physician, physician assistant, nurse practitioner, or 

clinical nurse specialist to certify the medical need for a power 

wheelchair.18 This provision is more stringent than the prior regulation, 

which did not necessitate a face-to-face appointment between a 

beneficiary and his or her prescribing health care professional. CMS is 

now developing quality standards for oxygen services and diabetic shoes, 

and regulations to implement the provision regarding a face-to face 

examination. 

 14Medicare prohibits suppliers from waiving copayments routinely or when waiver is 

offered as part of an advertisement or solicitation. 42 U.S.C. § 1320a-7a(a)(5) and (i)(6)(A) 

(2000). 

1542 U.S.C. § 1395m(a)(17) 2000. 

1642 U.S.C. § 1395m(j)(1)(B)(ii)(IV) (2000). 

17MMA § 302(a)(1), 117 Stat. 2223. 

18MMA § 302(a)(2), 117 Stat. 2224. 
Page 15 GAO-04-716T 

New authority and requirements for CMS in the MMA show more promise 

than past agency authority for setting market-driven payment rates. In the 

past, CMS generally was not successful in adjusting Medicare payments 

for DME to keep pace with changes in prices for medical equipment.19 As a 

result, Medicare often pays substantially more for an item than other 

public payers. The MMA requires CMS to begin using competitive bidding 

to set payment rates for DME.20 Competitive bidding has shown promise as 

a way to use market forces to reduce payment rates for selected items. 

Prior to 1997, CMS could adjust DME payment rates that were inherently 

unreasonable, but the process required was slow, cumbersome, and used 

successfully only once. In the Balanced Budget Act of 1997,21 Congress 

responded to concerns about CMS’s difficulties in adjusting excessive 

payment rates by authorizing use of a streamlined inherent reasonableness 

process for part B services (excluding physician services) and equipment. 

Under this authority, CMS could adjust payments by up to 15 percent per 

year using the streamlined process or could use a process with formal 

notice and comment to make larger adjustments. CMS published an 

interim final rule with comment period in order to allow the DME regional 

carriers to use the authority as soon as possible.22 CMS did not respond to 

comments before its rule became effective. 

DME regional carriers collected price data for eight groups of items and 

then took the first steps in applying the inherent reasonableness process 

to change payment rates for those items by publishing a notice to suppliers 

in September 1998. At that point, industry groups and suppliers expressed 

concerns about how the streamlined process had been implemented and 

the appropriateness of how price data were collected. Congress directed 

that we review the implementation of the streamlined inherent 

reasonableness process and in 1999, suspended any use of this authority 

until we issued our report and the agency issued a final rule taking into 

account our findings and public comments.23 Our July 5, 2000, report 

 19GAO-02-833T. 

20MMA § 302(b), 117 Stat. 2224. 

21Pub. L. No. 105-33, § 4316, 111 Stat. 251, 390. 

2263 Fed. Reg. 687 (Jan. 7, 1998). 

23Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. No. 106-

113, App. F, § 223, 113 Stat. 1501, 1501A-352 (signed into law November 29, 1999). 

New Authority Holds 

Promise for 

Improving CMS’s 

Success in Adjusting 

DME Payment Rates 

Agency Attempts to Adjust 

DME Payment Rates to 

Reflect Market Prices 

Largely Unsuccessful 
Page 16 GAO-04-716T 

recommended, among other things, that CMS clarify criteria for using its 

inherent reasonableness authority, strengthen carrier data collection 

methodology, and monitor beneficiary access after any payment changes.24

Since issuance of that report, CMS has not used its inherent 

reasonableness process to adjust payment rates. CMS issued an interim 

final regulation to implement its authority on December 13, 2002, which 

responded to comments on its previous regulation and our report.25 The 

agency is still completing more specific guidelines for revising payments, 

including how to collect data that are valid and reliable. CMS and a 

contractor are developing the guidelines and the agency intends to issue 

them by the end of 2004, after which it can begin using the inherent 

reasonableness process. In its 10-point plan, CMS has pledged to collect 

data on power wheelchair prices as soon as these guidelines are finalized. 

In our report, we recommended that CMS define in its regulation when 

payment rates would be considered what the statute calls “grossly 

excessive” and “grossly deficient.” It is in these situations that CMS may 

use its inherent reasonableness authority. CMS indicated in its regulation 

that it would adjust payment rates only when they were at least 15 percent 

above or below a “realistic and equitable” amount. By doing so, CMS 

limited its authority to adjust payment rates, since the agency has 

statutory authority to adjust fees when the difference is less than 15 

percent. 

The MMA gave CMS new authority and the requirement to begin using 

competitive bidding to set payment rates for DME. Through competitive 

bidding, suppliers provide information on amounts they would accept to 

gain business from Medicare beneficiaries, and their bids are used as a 

basis for the payment rate. In a demonstration of competitive bidding for 

DME and other part B-covered items in two localities that concluded in 

December 2002, fees set through bids were generally lower than fees 

otherwise paid by Medicare. As a result, Medicare should achieve 

estimated reductions in payments and beneficiary cost sharing that should 

 24GAO/HEHS-00-79. 

2567 Fed. Reg. 76,684. 

New Authority Holds 

Promise to Help CMS Set 

Payment Rates Closer to 

Market Prices 
Page 17 GAO-04-716T 

result in gross savings of $8.5 million.26 Products chosen for the 

demonstration were among those with the highest Medicare spending and 

considered by the agency to have the potential for savings. The products 

chosen did not include power wheelchairs. Estimated savings from the 

demonstration were accomplished without significant reported effects on 

beneficiaries’ access to competitively bid products. 

The MMA requires CMS to implement competitive bidding for DME, offthe-shelf orthotics, and supplies in at least 10 of the largest metropolitan 

areas by 2007, and 80 of these areas by 2009. CMS has the authority to 

choose the items to be bid and the specific localities for bidding. CMS has 

not decided whether power wheelchairs are among the items to be 

included in its initial implementation. Having suppliers offer bid prices 

appears to be a promising approach to achieve closer to market prices, 

compared to the experience CMS has had with the inherent 

reasonableness process. The MMA allows CMS to use information from 

the competitive bidding process to adjust payment rates in other localities. 

We discussed our findings with program officials, who provided us with 

technical comments, which we incorporated as appropriate. 

Mr. Chairman, this completes my prepared statement. I will be happy to 

answer questions you or other Members of the Committee may have. 

For further information regarding this testimony, please contact Leslie G. 

Aronovitz at (312) 220-7600. Sheila K. Avruch, Jennie Apter, Emily Gamble 

Gardiner, Sandra Gove, Joy L. Kraybill, Elizabeth T. Morrison, Lisa Rogers, 

and Craig Winslow contributed to this statement. 

 26CMS conducted the demonstration in Polk County, Florida, and in the San Antonio area in 

Texas for selected items of DME, orthotics, prosthetics, and supplies (DMEPOS). Two 

evaluations of the demonstration have been published. See U.S. Department of Health and 

Human Services, Health Care Financing Administration, Evaluation of Medicare’s 

Competitive Bidding Demonstration for DMEPOS: First Year Annual Evaluation Report 

(Baltimore, Md.: September 2000, Revised January 2001) and U.S. Department of Health 

and Human Services, Centers for Medicare & Medicaid Services, Evaluation of Medicare’s 

Competitive Bidding Demonstration for DMEPOS: Second Year Annual Evaluation 

Report (Baltimore, Md.: April 2002). 

Contact and 

Acknowledgments 
Page 18 GAO-04-716T 

Note: AS = American Samoa; GU = Guam; NMI = Northern Mariana Islands; PR = Puerto Rico; and 

VI = Virgin Islands. 

Appendix I: States in DME Regional Carriers’ 

Jurisdiction 
Page 19 GAO-04-716T 

Appendix II: Internet Advertisement for 

Power Wheelchairs 

(290353) 

Source: Internet Web site.

 We can even waive the remaining 20% of the cost for

 those who only have Medicare coverage.

XXXX
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